U.K.’s ‘Fraught’ CO2 Tax on Power Companies Doubles for 2014

The U.K. plans to almost double its carbon surcharge, a measure aimed at spurring investment in nuclear and renewables generation, in its second year.

The so-called carbon price support was set at 9.55 pounds ($15.13) a metric ton for 2014, according to a budget document posted today on the U.K. Treasury’s website. That compares with 4.94 pounds from April 2013, when the policy takes effect.

U.K. power producers burning fossil fuels like gas and coal will have to pay the government surcharge, which is calculated two years in advance, in addition to buying European Union permits to cover emissions. There is a risk utilities will end up paying more for emissions should EU allowances rise, according to PricewaterhouseCoopers LLP.

“Setting the tax rate two years in advance relative to a volatile commodity is fraught with challenges,” Jonathan Grant, director at PricewaterhouseCoopers’s sustainability and climate change unit in London, said today by e-mail.

Britain is seeking to cut carbon emissions by 34 percent by 2020. RWE AG (RWE), Europe’s biggest carbon emitter, and Drax Group Plc (DRX), owner of the largest power station in western Europe, say the levy makes it hard for them to sell power forward.

EU allowances for 2014 plunged 56 percent in the last year and were at 8.61 euros a ton as of 4:50 p.m. on London’s ICE Futures Europe exchange. The price averaged 14.39 euros in the year to the end of February.

The price support is intended to bridge the gap between EU permit prices and the U.K.’s carbon floor, which has been set through 2020 and determines the minimum level industries will pay to emit. The carbon floor starts at 16 pounds a ton in 2013, rising to 30 pounds by 2020.

The U.K. Treasury calculates the carbon support two years in advance. The 2014 support will be based on the average price of EU allowance futures for that year in the twelve months to February 2012, according to documents posted previously on the Treasury’s website. The measure will raise 1.7 billion pounds in its first two years, today’s documents show.